Two of the biggest names in packaged foods—Kraft and Heinz—are merging in a deal orchestrated by Warren Buffett and Brazilian private-equity firm 3G Capital Partners L.P., creating one of the world’s largest food and beverage companies.
More on Heinz, Kraft Deal
The companies didn’t disclose a value for the deal, but based on Kraft’s market capitalization following the announcement, investors pegged it around $ 49 billion.
The combined company, which will be called the Kraft Heinz Co., will have revenue of about $ 28 billion and include well-known brands such as Oscar Mayer meats, Maxwell House coffee, Jell-O, and Planters nuts, along with the namesake Kraft cheese products and Heinz ketchup and condiments.
The Wall Street Journal late Tuesday was first to report that Kraft Foods Group Inc. and H.J. Heinz Co., were in merger talks. Shares of Kraft surged 36% Wednesday to $ 83.17, its highest close—by more than 20%–since the company split in 2012.
The deal comes as Kraft and other major U.S. food makers struggle with changes in consumer tastes that have hampered their ability to sell packaged, processed food.
Heinz shareholders will hold a 51% stake in the combined company, while Kraft shareholders will hold a 49% ownership stake. Kraft shareholders also will receive a special dividend of $ 16.50 a share, representing 27% of Kraft’s closing price on Tuesday. Mr. Buffett’s Berkshire Hathaway Inc. and 3G Capital will provide the $ 10 billion to fund the special dividend.
In 2013, 3G teamed up with Mr. Buffett to buy U.S. ketchup maker Heinz for $ 23 billion.
3G, an acquisitive Brazilian firm known for buying consumer companies it considers bloated and aggressively slashing costs, has been looking for targets after it recently raised some $ 5 billion for deal making. Annual cost savings from the Kraft and Heinz combination could reach $ 1.5 billion by the end of 2017, the companies said Wednesday.
3G has become a major player in the U.S. food sector. Billionaire co-founder Jorge Paulo Lemann was a big shareholder in brewer InBev and helped engineer its 2008 acquisition of Anheuser-Busch.
In 2010, 3G took private fast-food restaurant Burger King Worldwide Inc. Last year, 3G bought Canada’s coffee-and-doughnut retailerTim Hortons Inc. through its Burger King holding. The $ 11 billion deal was financed in part by Mr. Buffett.
The new company’s shares would trade publicly, according to a statement announcing the deal. Berkshire and 3G also indicated they don’t intend to sell their stakes in the new company any time soon, saying they “are committed to long-term ownership of the Kraft Heinz company.”
Mr. Buffett said on CNBC that Berkshire would own about 320 million shares in the new company. He added that the deal had been in the works for about four weeks.
On whether the deal’s structure is attractive enough for Kraft shareholders, Mr. Buffett said, “So far it looks like they like it, and if they don’t like it, they can probably sell it for a lot more than perhaps Kraft could have been sold to anybody else.”
Alex Behring, chairman of Heinz and managing partner at 3G Capital, will become the chairman of Kraft Heinz, and Bernardo Hees, chief executive of Heinz, will be the CEO. John Cahill, Kraft chairman and CEO, will become vice chairman, and the board of directors will consist of five members appointed by the current Kraft board, as well as the current Heinz board, including three members each from Berkshire and 3G Capital.
Today’s Kraft was born in a huge corporate split in 2012, when it was spun off by its namesake, leaving an international snacks company now called Mondelez International Inc.
Kraft has touted its leaner cost structure compared with other packaged food companies, having cut jobs and eliminated other costs. But it is still highly vulnerable to the changes in consumer tastes.
Kraft Deal is Year’s Largest. 3G’s deal to buy Kraft through its Heinz holding marks the year’s largest deal to date globally, according to Dealogic. Putting the value at $ 36.6B, it easily exceeds Cheung Kong’s $ 23.6 billion reorganization with affiliate Hutchison Whampoa. AbbVie’s pending $ 21 billion purchase of Pharmacyclics is now third. The Kraft deal also shows that last’s year’s pace of deal-making is not abating. (email@example.com; @DanaMattioli)
3G Can Still Find Fat Where Trian Has Forced Diets. The activists at Trian pride themselves on cost-cutting and running their companies efficiently. But with Kraft, 3G Capital looks likely for the second time to come in and slash where Trian has already been. Trian has talked up costs reductions at Kraft after it split with Mondelez, highlighting it as an example of why companies do well breaking up. Meanwhile, in 2013, 3G bought Heinz, where Trian had been on the board since 2006. In its fight with DuPont, Trian has espoused the costs being cut by 3G at Heinz. The ability of 3G, compared with Trian, partly highlights the difference between someone getting full control and an activist with a minority on a board. (firstname.lastname@example.org; @DaveCBenoit)
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With products including its bright orange macaroni and cheese, Lunchables, Oscar Mayer deli meats and Cool Whip dessert topping, Kraft has struggled of late, buffeted by changes in consumer tastes and other factors that have challenged many of the biggest and most established packaged-food companies. Its revenue last year was effectively flat at $ 18 billion, while net profit fell 62% to $ 1 billion, in part because of higher commodity costs and big charges related to post-employment benefit plans. The company has said it lost market share in 40% of its U.S. businesses and was flat in the rest.
As people shift to buying fresher foods they perceive as healthier, Kraft has attempted to adapt by taking artificial coloring out of some of its cheeses. It also has trumpeted a high-protein snack pack called P3—which combines meat, cheese cubes, and nuts—sold by its Oscar Mayer brand.
Another recent effort stirred controversy: Kraft struck a deal to put the Academy of Nutrition and Dietetics’ “Kids Eat Right” logo on its single-sliced American cheeses products, prompting ridicule from Comedy Central host Jon Stewart and criticism from members of the health-professionals group who said it shouldn’t have seemed to endorse the product.
Kraft has made headway revitalizing some older brands like Planters and Jell-O, but its efforts so far haven’t sparked a turnaround in sales and profits.
The deal is noteworthy in terms of who helped put it together. There was only one financial adviser for each company, neither a bulge-bracket Wall Street bank.
Lazard was Heinz’s exclusive financial adviser, while Cravath, Swaine & Moore and Kirkland & Ellis were its legal advisers. Centerview Partners LLC was Kraft’s exclusive financial adviser, while Sullivan & Cromwell was its legal adviser.
—Annie Gasparro contributed to this article.
Corrections & Amplifications:
Kraft Foods Group shareholders will receive a special dividend of $ 16.50 a share, representing 27% of Kraft’s closing price on Tuesday. An earlier version of this story misstated the percentage as a premium.